Gov. pushes to get budget movement

Besieged Senate Republicans continued to block passage of a state budget Friday night even as Gov. Arnold Schwarzenegger publicly sided with Democrats and urged GOP senators to give up the fight.

The deadlock in the Senate persisted despite the Assembly passing a budget on a bipartisan vote following an all-night session into Friday morning. The Assembly has since disbanded for a monthlong recess. GOP lawmakers complain that the Assembly spending plan does not cut deep enough and are holding out for more reductions.

On Friday night, Schwarzenegger, whose role in budget talks has largely been limited this year, stepped in to warn Senate Republicans that he will not support their demand to cut the state’s operating deficit -- $700 million under the budget plan passed by the Assembly on Friday -- to zero.

“Bringing the operating deficit to zero this year would mean a cut to the education budget,” he said. “The question now is whether we cut education funding, and I don’t think that’s what the people of California want. I will not cut education.”

He said the Assembly plan is “a budget the people of California can be proud of.”

The governor’s statement came after repeated pleas by Senate Leader Don Perata (D-Oakland) for his help getting at least two Senate Republican votes -- the number needed to implement a state budget. Schwarzenegger’s comments suggest he is losing patience with the impasse and will begin putting political pressure on the GOP holdouts.

But Senate Republican Leader Dick Ackerman of Irvine said the members of his caucus were not ready to fold. He declared that no budget would be passed Friday. “There’s a number of issues still outstanding,” he said. “We’re still spending too much.”

Ackerman said that in addition to spending reductions, Republicans want to see certain environmental regulations on business relaxed and want more say in how billions of dollars in public-works borrowing approved by voters in November gets spent. He declined to disclose all his specific demands.

“I have a list, but I’m not going to give it to you,” he told reporters. “We’ve given the list to all the negotiators, and they’re the ones that can make the decision. Every time we give them a list, it gets rejected.”

Democrats, who have already given in to several GOP demands, welcomed the governor’s involvement. They have agreed to curb public transportation spending by nearly $1.3 billion, delay welfare cost-of-living increases for the elderly and disabled and scale back drug treatment programs for prisoners.

Any attempt by the Senate to adopt a budget that is substantially different from the one the Assembly passed could leave the state in financial limbo for weeks, since the Assembly won’t be in town to approve it. Such a delay would leave the state unable to make scheduled payments to school districts, local governments and vendors.

Perata said getting the two Republican votes “is the governor’s responsibility, and he’s engaged. I’m quite confident that sooner or later they will come along.” In the meantime, he says he will keep the Senate in session until a budget is passed. He has ordered a lockdown of the Senate, which forces lawmakers to remain in the chamber until he releases them.

“We’ve put up our votes,” he said. “We’ve done what we are supposed to do.... As far as I’m concerned we will stay here until the Republicans decide somehow it’s in their best interest and their constituents’ interests to vote for it.

“At some point it becomes an embarrassment to the state and eventually becomes an embarrassment to the chief executive,” Perata said. “And I don’t think he deserves to be embarrassed, not over this budget.”

Meanwhile, a controversial $500-million package of tax breaks approved as part of the Assembly budget deal appeared unlikely to survive.

The 63-page bill that would give big tax advantages to Hollywood film companies, jet owners, energy firms and other businesses came as an affront to many in the Capitol who had been involved in tax issues for years yet had no idea the policies would be jammed into a budget deal.

“They specifically did it in the middle of the night because they know every time this stuff sees the light of day it is rejected,” said Lenny Goldberg, president of the union-backed California Tax Reform Assn.

The sun had barely risen before the bill that had just been passed began to fall apart.

The cost of the package -- which includes five different corporate tax breaks -- had been grossly underestimated by Assembly staffers, who declared to the press it would amount to a relatively small $140 million a year. It turned out to be several times that. Getting the wording right in the bills proved trickier than expected, as well.

The Assembly signed off on the plan around 4 a.m. Friday. A few hours later, policy analysts and lobbyists all over town -- even those who favored tax breaks -- were declaring it a debacle. By evening, Assembly leaders were sending out a memo in the Capitol stating that one key part of the bill, a research-and-development tax credit for companies, had an error in it that could result in business taxes actually going up.

A tax break on jet fuel that was intended to be targeted to the airline industry was unintentionally written in a way that would allow private jet owners to dodge the tax as well. A tax break intended to help multi-state businesses with a large payroll in California was estimated by the Assembly to cost $39 million a year. The state Franchise Tax Board had a different amount in mind: as much as $400 million.

“Their tax package had a few problems,” Ackerman said.

Perata called passage of the tax package an “irresponsible action to take in the dark of night without any debate or discussion.” He declared the proposal “dead on arrival” in the Senate.

Lawmakers in the Assembly say they have no regrets about bringing the tax issues into the budget debate.

“The Assembly continues to believe that we need to have a debate about using the tax code to create and keep jobs in California,” said Steve Maviglio, spokesman for Assembly Speaker Fabian Nunez. “This was never meant to be the be-all and end-all to do that. We moved the bill to the Senate to continue to work on it.”

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evan.halper@latimes.com

patrick.mcgreevy@latimes.com

Times staff writer Nancy Vogel contributed to this report.